The Federal Reserve raised interest rates four times in 2018, and Fed officials are anticipating continuing increases this year. This marks the first period of rising rates in over a decade. It's also an opportune moment for companies to adjust cash management strategies accordingly.

Businesses with the analytics resources to run market simulations can use scenario planning to anticipate—and prepare their response to—the most likely interest rate outcomes. However, many businesses lack the resources to effectively complete such an analysis. Their analytics teams may be lean (or non-existent), but these companies will be affected by rising rates at least as much as the big guys.

Small and midsize businesses might be tempted to simply move their excess cash into interest-bearing accounts with rates of return that are rising. This approach will be especially appealing for organizations whose sales are on the upswing. But maximizing interest earned on cash is not the only priority a business should consider.

Companies of all sizes need to carefully examine both their balance sheets and their cash flow statements in the context of rising interest rates. Two specific strategies that treasury organizations should consider for optimizing cash flows in this rate environment are renegotiating payment terms and loan agreements, and taking advantage of technology.

Renegotiating Payment Terms and Loan Agreements

Businesses that maintain an operating line of credit with a variable interest rate should always be on the lookout for opportunities to improve cash flow. A marginal reduction in the balance outstanding on the credit line can often produce a greater benefit than would a slightly higher yield on surplus cash sitting in a bank account.

Moreover, reviewing collections and disbursement practices may reveal opportunities to renegotiate payment terms with clients and/or vendors to reduce outstanding balances on the working capital line of credit. At this point in the rate cycle, competition for loans is increasing, which results in a wider range of options for business owners.

Securing advantageous rebates and terms is an important component of an effective cash management strategy (as noted in Deloitte's working capital series). Now could be a good time to secure a new loan, or to extend the terms of existing loans at a fixed rate, since the cost of a variable-rate loan will inevitably increase as rates continue to rise.

Re-evaluate Payments Processes and Technologies

Ten years ago, customers across industries paid most of their bills by check. Today there are many more payment rails from which to choose, and many of them significantly increase the speed with which businesses can collect payment. Faster payments, in turn, mean a company can reconcile accounts more efficiently. This quicker turnaround can translate to 15 or 20 days of cash that the organization wouldn't otherwise have. Businesses can use these funds to pay down credit lines.

A number of cash management technologies that are available now did not exist during the previous period of rising interest rates (2004 to 2007). Mobile payments, for example, can have a significant impact on company cash flows. Not only do they provide an opportunity to receive funds in new ways—which presumably creates new opportunities to increase revenue—but these solutions' real-time access to payment data also allows companies to more intelligently manage receivables and payables.

Companies in retail or similar sectors should consider accepting credit cards and mobile payment options, if they don't already. The decision process needs to consider the effect that interchange fees will have on cash management, as well as the need to ensure a smooth and positive experience for customers. On the flip side, companies can schedule payments to their own vendors with a business purchase card (p-card) or online transfer in order to maximize their time to pay outstanding balances.

Capitalizing on technology innovations to accelerate ongoing process improvements is likely to pay dividends as rates continue to rise.

An ever-expanding range of ways to facilitate cash management can introduce a higher degree of complexity to the task. A trusted and qualified financial adviser can be an invaluable partner in navigating this process. Companies that evaluate their options carefully, and take measures to adjust their payment terms and technology systems accordingly, will be better positioned to keep cash flowing—and business running smoothly—as interest rates continue to rise.

Jeremy Parker is director of corporate treasury solutions for Boston Private, a provider of integrated wealth management, trust, and private banking services. In this role, he is responsible for delivering advice and products to help clients successfully manage their cash, operating liquidity, and financial risk. Parker previously served as treasurer of Boston Private Bank & Trust.

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Interest Rate Response for Small and Midsize Companies

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